This article is intended for those of you who are at the beginning of your investing journey
and want a simplistic look at the return on Eimco Elecon (India) Limited (NSE:EIMCOELECO) stock.

If you purchase a EIMCOELECO share you are effectively becoming a partner with many other shareholders.
Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders.
This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock.
Therefore, looking at how efficiently Eimco Elecon (India) is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

ROCE: Explanation and Calculation

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere.
Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies.
We’ll look at Eimco Elecon (India)’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations.
I have calculated Eimco Elecon (India)’s ROCE for you below:

As you can see, EIMCOELECO earned ₹6.7 from every ₹100 you invested over the previous twelve months.
This shows Eimco Elecon (India) provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if EIMCOELECO is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.

NSEI:EIMCOELECO Last Perf November 25th 18

What is causing this?

Eimco Elecon (India)’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Eimco Elecon (India) is in an adverse position, but this can change if these factors improve.
So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving.
Looking three years in the past, it is evident that EIMCOELECO’s ROCE has deteriorated from 12%, indicating the company’s capital returns have declined.
Over the same period, EBT went from ₹279m to ₹212m and
capital employed has increased due to
a rise in total assets employed
, which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

Eimco Elecon (India)’s ROCE has decreased in the recent past and is
currently at a level that makes us question whether the company is capable of providing a suitable return on investment.
However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as
future prospects and management ability.
If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate EIMCOELECO or move on to other alternatives.

Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Eimco Elecon (India)’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St is a financial technology startup focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of equity analysts with a public, market-beating track record. Learn more about the team behind Simply Wall St.

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